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Says it’s no election gundu
but planned ahead with private sector input; better cash flow and lower
interest rates key benefits
By Nisthar Cassim Finance Ministry Secretary Dr. P.B. Jayasundara said that the relief package announced by the Government on Friday would stimulate the internal and external crisis-hit economy and take forward the reforms agenda to fuel greater growth. In an exclusive interview with the Daily Mirror, Dr. Jayasundara also dismissed allegations that the package was an "election gundu" and noted that the Government was anyway planning to offer a stimulus package to help the economy to overcome short-term difficulties. "The decision to call for elections on December 5 was unexpected. Since the July 24 LTTE attack we have been working on an overall relief package with various chambers of commerce and industry and trade associations. In fact the relief package for economic sectors was being studied by the Cabinet much before the election announcement," he said. "For example given the serious impact on tourism and urgency in providing relief, a comprehensive package was discussed and approved with the industry. We were also having several discussions with the apparel sector as well, while negotiations with London underwriters and a Government guarantee brought immediate relief to the economy with a steep reduction in war risk premia and surcharges," he said. Dr. Jayasundara also said that several of the measures were in fact to be included in the Government’s 2002 Budget and they were included in the short-term relief support program to stimulate a faster recovery of the economy. "Irrespective of whether they are developed or developing, all countries have been affected by the global recession. The attacks in the US aggravated this further. Many countries have come forward with various stimulus packages. Sri Lanka has been suffering through successive shocks both internal and external. In addition to high defence expenditure and oil prices, the drought and power cuts had a bearing followed by the LTTE attack at Katunayake and the US attacks," he said. With regard to the pay hike for public servants, he said that too was under consideration for some time and was to be announced early or to be included in the Budget 2002. Dr. Jayasundara said that the expenditure on the increase in interim allowance and pension would cost the Treasury around Rs. 2 billion in the next three months. Rather than calculating the loss of revenue to the Government, he described the reduction in National Security Levy (NSL) by 1% to 6.5%, stamp duty on Letters of Credit to 1% from 2%, waiver of 1% Turnover Tax on the banking and finance sector as well as other moves would give around Rs. 400 to Rs. 500 million in the hands of the private sector. "This will definitely improve their cash flow," he added. At numerous meetings, the private sector have repeatedly highlighted that the high cost of borrowing continues to be a major constraint. “We have gradually brought down the interest rates (for benchmark Treasury Bills) from as high as 20% to 16%. Banks did reduce their lending rates by around 1 to 2%. Yet, the private sector felt it was inadequate. A problem in the banking sector was the high intermediation cost.” “We have addressed this by waiving off 1% Turnover Tax, reducing NSL by 1%.” With these and other measures, which would be announced shortly, Dr. Jayasundara expects a further reduction of around 1 to 2% in interest rates. "There has been a tripartite effort (Treasury, Central Bank and Commercial Banks) as well as involving the Chambers to address the high cost of borrowing and there have been useful recommendations and I am confident of a further reduction in interest rates," the Treasury chief added. Dr. Jayasundara will be meeting business leaders today at 5.00 p.m. while at 3.00 p.m. he would be attending a meeting between the Central Bank and Commercial Banks where a firm decision is likely to be made in this regard. The Central Bank may also consider reducing the Statutory Reserve Requirements among banks as an additional measure to support a reduction in interest rates. Among other measures the duty rebate on imports for exports has been increased and incremental exports would be rewarded. Fresh funds have been released to the Customs enabling it to withdraw an earlier circular, which indicated a temporary suspension of the scheme from October 15. The interest rate on US Dollar borrowing has been reduced to 6% from 8% while last week Minister Ronnie de Mel held a meeting to finalise the harmonization of facilities for the BOI and non-BOI enterprises. The import duty on essential raw material has been removed (The Customs has already begun implementing this) as per recommendations of the Joint Inter-Ministerial Committee appointed in terms of a Budget 2001 proposal to boost local industry. The construction sector, which has been one of the star performers despite a depressed economy, has got a further fillip with import duty on cement also cut. The Treasury Chief said that the stimulus package was essential and it was possible due to satisfactory fiscal management despite successive shocks. "The exchange rate has been stable and inflation has been under check. Due to the control of unnecessary imports, we have ensured there are no serious Balance of Payments problems nor do we foresee one. Foreign reserves at present is US $ 1.2 billion and we are building it further with the US Dollar Bond issue, he said, adding that domestic borrowing would be more or less maintained at levels originally projected for 2001. This is to ensure that the stimulus package will lead to a cut in interest rates rather than fresh Government borrowing pushing them up. Nevertheless he admitted that given the shocks, slow economic growth and shortfall in revenue and increase in current expenditure, the Budget deficit would be higher at around 9.2% of GDP as against the original target of 8.5%. Savings from defence expenditure and some of the capital investment that were postponed due to external factors is likely to cushion the pressure stemming from high current spending. Though all measures came into effect from Friday (October 12) Dr. Jayasundara expects the benefits of the relief package to be felt by the economy from November. "Our support program essentially focuses on reducing the cost to the private sector, improve their cash flow and encourage them to invest in and sustain their businesses. Therefore we expect the private sector to make maximum use of the package," he said. It is also expected it will help the country to sustain an overall and full-year GDP growth of around 2 to 3% as against 0.9% in the first half. Private sector analysts forecast that 2001 could well produce a negative growth. Several of the measures are also reforms-oriented hence it will take forward the Government’s liberalisation program further. He said that the ADB has offered US $ 25 million support to simplify the tax system and also assist the Small and Medium sector," Dr. Jayasundara told the Daily Mirror. What has been done? Pay hike for public servants (Rs. 1,200 and pensions Rs. 750) from October 1. Save the Nation contributions withdrawn. 1% reduction in NSL to 6.5%. 1% Turnover tax on banking and finance sector removed. Diesel vehicle tax removed. Import duty on selected essential raw materials removed. Import duty on bagged cement cut to 15% and bulk cement to 10%. Stamp duty on LCs reduced to 1%. Interest rate on foreign currency borrowing cut to 6%. Rs. 1 billion for drought relief. Farmer loans of Rs. 20,000 written off. Relief package for tourism sector with interest rate subsidy and rescheduling of loans. Collection of cess on export of shrimp and prawn suspended. Increase in duty rebate scheme for exporters. US 50 million guarantee to reduce war risk premia and surcharge. What’s in store? Further interest rate cuts (Treasury, Central Bank, Commercial Banks, and Chambers meet today) Increase in reserves from the current $ 1.2 billion with a $ 50 million initial issue of Dollar Bonds Budget deficit to rise to around 9.2% of GDP from the original target of 8.5% Further simplification of tax system - Do away with stamp duty on LCs and other financial documents by 2002; Personal income tax rate to be reduced to 15% from 2002 ADB funded support for small and medium industrial sector Harmonization of BOI and non-BOI facilities Support for textile sector for greater promotion in global markets and lobbying of quotas The global picture Singapore
South
Korea
Taiwan
Hong
Kong
US
India
In the first round, a reversal of the June 1 cuts for the garment sector was carried out. This time, the steps are bigger and bolder as the robust export sector is the only silver lining in an otherwise bleak economy. Meanwhile, optimistic of keeping price levels low, finance minister, Yashwant Sinha, said on Monday that the government will step up its initiatives in the infrastructure sector, to spur demand and offset the negative impact on exports after the September 11 terrorist attacks in the US and the US backlash in Afghanistan. "We will step up our initiatives in the infrastructure sector which will spur demand in the domestic sectors. The increased demand would enable us to sell the goods in the domestic market which we are unable to sell in international markets," Sinha told reporters on the sidelines a Ficci seminar on insurance here. "We will continue to watch the situation and take necessary steps to insulate the Indian economy from the global impacts. We will do whatever is necessary for spurring investment and growth," he said. Sinha admitted that the war has impacted some sectors of the economy including the stock market, rupee, tourism, aviation, foreign investment inflow and exports, but said the dimension of impact on the Indian economy was yet to be assessed. Sinha did not hide his concern over the sluggish 1.8 per cent growth in industrial production during August compared to 5.0 per cent in the year-ago month. The Associated Chambers of Commerce and Industry on Monday asked the Reserve Bank to reduce the bank rate, cash reserve ratio and interest rates spread by 1 per cent and sought a waiver of penalties on export bills, while pointing out that the export credit rate needs reduction by at least 3 per cent. In a note to the RBI, the Chamber pointed out the difficult external environment, and said there was a need to peg the export finance at 1 per cent above labour and that the banks should be advised not to charge penal interest for delays in the payment of export bills.
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